How to Measure Customer Loyalty for Generating More Sales

in General Business Marketing

Every business understands the importance of customer loyalty and retention to generate a continuing stream of revenue from existing customers.  It’s always gratifying to see customers returning to buy again, but how do you know whether and how many of your customers are inclined to return?

A major benefit of customer loyalty is referrals from existing customers to other buyers.  Customers who are very satisfied with the product / service / solution from a company are more likely to recommend doing business with that company to colleagues, business associates, friends and family.  Referrals should be a powerful component of every marketing strategy.

Before starting or running any customer loyalty and referral programs, it’s important to measure customer loyalty.  But how does one measure customer loyalty?  Measuring customer loyalty should provide:

  • An objective and consistent measurement
  • A measurement that is easy to understand and provides a common goal across business areas
  • A means to interpret results for improving customer loyalty
  • A means to benchmark your performance with your industry and competitors.

Based on previous experience, the Net Promoter Score® (NPS) is a good approach for measuring customer loyalty.  NPS was originally introduced by Fred Reichheld in his 2003 Harvard Business Review article “The One Number You Need to Grow” and his book “The Ultimate Question: Driving Good Profits and True Growth”.  It was subsequently developed by Reichheld, Bain & Company, and Satmetrix who hold the registered trade marks for Net Promoter, NPS, and Net Promoter Score.

Determining your Net Promoter Score is relatively straightforward:

  • Ask your customers one question – “How likely is it that you would recommend [company name] to a friend or colleague?”
  • Customers respond with a 0-10 point rating with 10 being extremely likely to recommend
  • You then create 3 categories of customer loyalty based on the scores:
    1. Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others
    2. Passives (score 7-8) are satisfied but unenthusiastic and will consider competitive offerings
    3. Detractors (score 0-6) are unhappy and/or feel no loyalty to your company.
  • The NPS is calculated as the % of Promoters minus the % Detractors.

The logic behind the NPS calculation is that Promoters will keep buying and referring others to fuel your growth while Detractors can damage your reputation and impede growth through negative word-of-mouth.

A NPS of 50% or higher is considered good.  Companies with great customer loyalty have a NPS in the 70-80% range.  However, research shows that most companies are floundering along with NPS in the 5-10% range.

When you do the customer survey, don’t just ask the one NPS question.  Formulate a few additional supporting questions that will help you analyze where to focus your attention for improving your customer loyalty and NPS.  Don’t go overboard and ask too many questions – we all dislike taking surveys with endless questions.

NPS is not perfect and has been subject to some criticism.  However, it is a popular approach favored by many business owners and operators because it provides a straightforward single measure that can be compared with other companies and industry averages.  Just as important – it is one metric in which all functional areas of your business can have a stake and influence.

More details on NPS are available on the Net Promoter website.
Copyright © 2010 Ingistics LLC and Marketance™ www.marketance.com

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